Directors need to face up to responsibilities

Jun 20 2008 By The Journal

Neil Harrold gives directors advice on weathering the current financial climate

WE ARE now in the midst of the most challenging business conditions for the last 15 years. Recently it has been reported that the surge in the price of crude oil has resulted in oil companies forcing airlines to pay cash in advance for jet fuel. Although the harder line taken by the oil companies is likely to have been influenced by the collapse of three transatlantic carriers in the last six months and the reported woes of certain other airlines, there has not – as yet – been an upsurge of corporate insolvencies on the scale last seen in the early 1990s.

Rather, it is the fear of a return to recession that is leading businesses of all types – not just global oil companies – to tighten up on who they do business with and how.

Responsibility for managing a company’s fortunes through these turbulent times rests squarely on the shoulders of its directors. Changes recently implemented by the Companies Act 2006 have spelt out – for the first time in legislation – that company directors must act in the way that is most likely to promote the success of the company.

It is the decisions made now by management that will help to determine whether they successfully weather the economic storm.

In addition to imposing a duty on directors to exercise independent judgment and reasonable care, skill and diligence, the Companies Act 2006 also requires directors to consider:

:: The likely long-term consequences of any decision.

:: The interests of the company’s employees.

:: The need to foster business relationships with customers, suppliers and others.

:: The impact of the company’s operations on the community and the environment.

:: The desirability of the company maintaining a reputation for high standards of business conduct.

:: The need to act fairly as between members of the company.

:: In certain circumstances (particularly if the company is facing financial difficulties) to consider or act in the interests of the company’s creditors.

While it can be argued that these requirements are common sense, directors who keep their finger on the pulse of what is happening in their business are likely to be much better placed to adapt to the present challenging conditions.

The need for directors to keep themselves up to date with financial information on the company’s trading position is probably their most fundamental responsibility, irrespective of any other roles that an individual director may have within the company. This applies just as much to sales and production directors as it does to managing and finance directors.

Budgets and forecasts must be regularly reviewed and compared against actual outcomes, especially where input costs and demand are volatile.

Assumptions made when the budget was originally adopted should be regularly checked and any appropriate revisions made. This applies to businesses of all shapes and sizes – the recent spike in the cost of oil is likely to play just as much havoc with the finances of an owner-managed haulage company as it has done with transatlantic airlines.

Business recovery professionals – from both legal and accounting backgrounds – have a key role to play when a business is starting to suffer financial stress.

Long gone are the days when they were perceived as undertakers – brought in only to “measure up the shroud” of a moribund company beyond salvation.

Early involvement is likely to increase the survival options open to a business under pressure – decisive action taken early enough may make the difference between salvation and the death of the business.

Conversely, delay in the seeking of help is likely to diminish the available options and even – in a worst case scenario – result in directors running the risk of disqualification and personal liability for wrongful trading.

The lesson of the last recession in the early 1990s is that eventually the economic sun will shine again. Those directors who take their responsibilities seriously will be best placed to take advantage when the sunny days return.

:: Neil Harrold is a licensed insolvency practitioner and partner at Hay & Kilner Solicitors. For further information contact him on (0191) 232-8345 or email neil.harrold@hay-kilner.co.uk